Before you invest in any kind of asset, it is essential to have the right reasons for such a financial move. Randomly investing in a scheme or a product simply because it is popular or because its value appears to be moving on an uptrend is never the right reason to put your money on an asset. 

So, when it comes to choosing alternative investment options for your portfolio, you need to first have the answer to a fundamental question - Why choose these assets? As it so happens, there are many types of alternative investments available in the market today. In the previous chapter, you even saw a preview of the top five alternative assets like gold, private equity, real estate, collectibles and digital assets.

That said, these alternative investments also offer many unique advantages for the investor. These upsides can answer the question of why you should choose alternative investment options for your portfolio. 

What are the advantages of investing in alternative assets?

Given that there are already a plethora of conventional investment options, you may be curious about why you should even consider alt assets in the first place. However, as it turns out, a portfolio that includes some alternative investments can benefit in many ways. Here is a closer look at the main advantages of investing in alternative assets. 

• Low or no correlation with the markets

One of the key reasons to include alternative investments in your portfolio is that they often bear little to no correlations with the stock market. This means that the ups and downs of the market do not affect the valuation of most alt investment options. So, if the economy is in a particularly sensitive zone, or if the market turns bearish, you can rest assured that these developments may not affect most alternative assets adversely. This provides a nice cushion for your portfolio, since any losses sustained from unfavorable market movements can be absorbed by your alt assets easily. 

• Less volatility 

The prices of listed assets in the market fluctuate based on a number of factors like the underlying company, the broad market economic forces, and overall demand and supply. However, since the market for alt assets is not as populated, and since these assets are not correlated with the stock market, there are fewer forces at play here. This results in lower volatility in the prices of alt investment options. For example, the price of real estate and art and antiques do not fluctuate very frequently. In this regard, some alt assets can be safe haven assets when the stock markets are particularly volatile.  

• Passive income or investment benefits

Alt investments can also offer passive income or returns over time. For instance, real estate is one of the most popular alt assets in the context of setting up a source of passive income. You can invest in one or more residential or commercial properties and let them out as rentals. Alternatively, private equity investments also act as a reliable source of passive gains, provided you invest in the right businesses. With adequate research, you can enrich your portfolio with alt assets that generate consistent passive income over the long run. 

• Potential for high returns

Alt investments can also come with the potential to generate high returns over the long term. Take the case of real estate or even gold, for that matter. These assets have been preferred by generations of investors for their inflation beating returns. P2P lending, angel investing and collectibles can also generate significant returns if you choose the right avenues to put your capital in. However, keep in mind that these returns are not guaranteed, since alt assets also come with their own risks. 

What are the downsides of investing in alternative assets?

Despite the advantages mentioned above, there are some potential downsides associated with alt investments. Here are the top two pitfalls that you should be mindful of.

• Lack of regulation

One of the main downsides of alternative investment options is that they are not regulated by any governing authority. Most alternative assets such as real estate, collectibles, private equity and digital assets are not governed by any regulating authority. This also makes it harder to determine the value of most alternative assets, since there is no benchmark for comparison.

• Low liquidity

Another important thing to keep in mind before investing in alternative investments is that most of them fare low on liquidity. So, it is best not to rely on the amount invested in alternative assets for meeting your emergency needs. 

Wrapping up

This should give you an insightful peek into why alternative investments may be the right choice for your portfolio. However, you need to keep in mind that there are some downsides too. And not all alternative assets pose the same risks or offer the same benefits. For instance, while investing in collectibles may be highly risky as well as expensive, investing in gold is easier and often safer. Speaking of gold, it may just be India’s favourite alternative investment option. Head to the next chapter for the details. 

A quick recap

• One of the key reasons to include alternative investments in your portfolio is that they often bear little to no correlations with the stock market. 
• Low correlation with the markets also results in lower volatility in the prices of alt investment options. 
• Alt investments can also offer passive income or returns over time, and they come with the potential to generate high returns over the long term. 
• However, one of the main downsides of alternative investment options is that they are not regulated by any governing authority. 
• Another important thing to keep in mind before investing in alternative investments is that most of them fare low on liquidity.